1258: BRRR Method, Manufactured Homes, Self-Management & Future Expectations Impact on the Housing Market

Do your research. There are some providers out there, I mean, this is true not just in real estate, but in general in sales that just want you to get information from them. Do your research and you'll come to see, I think, at least for me, that Jason, you, you look out for your clients. You, I mean, I've, with my investment advisor, there were things that I was looking at initially and there was absolutely no pressure. There was, okay, yeah, keep asking questions, do that, research it. And not only is it better sales because you have a confident client, but also you become more knowledgeable. So I'd say do the due diligence, constantly, investigate, ask questions and also just look at the big picture. I think about that all the time. You know, there are going to be hiccups. I've already experienced some hiccups and I haven't been investing that long, but overall, even with those hiccups, it's still profitable. Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and, and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial independence day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1258. 1258. Thanks for joining me. We're going to be talking about future pricing and real estate price to earnings ratios, PE ratios. We'll compare this to the stock market, of course. And we've got Doug joining us for that in a two part series for today and tomorrow. But first we have Adam here with me. And Adam, it's a little cold outside. Oh no, wait, it's not cold, it's the middle of summer. But brr.

Very nice. Nicely done. It's a pleasure to be here. Pleasure to be here to listen to all your jokes.

Yes, yes, I'm occasionally funny. Maybe that wasn't one of the times. So BR is this acronym you may have heard about in the real estate investing world. People say it differently, but generally speaking it's buy, renovate, rent and refi. Right, Brr. And a lot of people are seduced by This I think, wrongly so. I think brrr is good for the professionals, the big kids who do it as a full time thing. I want you all to know I have done brrr before, but you'll notice that I don't do it now. Why not? Why not? Adam, you're doing a little burr in your own home right now, aren't you?

Yeah, we're doing a little bit of the first r, the renovate, because we had, shockingly, we had a contractor five or six years ago who came in and did a whole lot of work for us and took out a wall and added railing instead. And turns out they did a terrible job. It was good for a couple months.

Stop, stop, stop. You're not saying that contractors don't do their job right, are you?

I mean, I would hate to start that rumor.

Yeah.

And I know most people. Nobody's ever said that before, and I would hate to start that now.

Right.

I've heard. I've heard whispers that some of them.

Don'T, I tell you. Yeah, you mean, you mean the ones that it's hard enough to get them to show up, much less do their job. Right. And do it in a timely manner without making a huge mess and without causing a domino effect that causes other problems and then overcharging you and filing a mechanics lien on your property to boot, right?

Oh, yes, yes. And that's hard enough just in your own market.

Yeah.

When.

When you're right there and it's your own house. Right. Try it from a distance. Yeah, try it from a distance. Oh, gosh. So the numbers.

The numbers can look really good whenever you look at the. The brrrr numbers that a lot of people show out there.

Yeah, they look seductive. But what you know what those brrrr people never tell you is they never liability either. They might show you that. Hey, you know, I bought this property and somehow after a huge hunt for the property, I bought it 20% below market and. Or maybe 30%. Well, I mean, below market. What does that mean after repair value or before repair value? I don't know what that means. Better get specific about that. But they bought it, they got a good deal on it. Let's give them that. And then they started the construction work and then they rented it out and then they even refinanced it. And that's better because they didn't pay the capital gains tax. So hopefully they're keeping it to get over the capital gains and turn it into an ultimate 1031 exchange. Maybe somewhere down the road. But the ones that flip them never tell you about their tax bill. That's what I was alluding to. It's not a complete brrrr.

I mean, when you talk about being taxed at ordinary income levels, you're. That can start hurting real quick.

Oh yeah? Yeah. Ouch. Yikes. Yeah. So the contractor. Now I said to you when you were talking about your job, you know, why didn't you just call the old guy back and make him do the job right?

Why would I trust him to do it right the second time? Well, he.

You paid him.

Well, I did pay him. I will agree to that. And it was several years ago and he came back out because we had a couple other little things go wrong. And I just, I don't trust him at this point. And so.

So you're just paying again?

Yep. Why pay once when you can pay twice, you know?

Yeah, right. What a deal. What a deal. So, so what happened? And how. How is it that you waited all these years for the problem to appear or what happened?

Essentially, we had a wall. We had a half wall upstairs, A.

Pony wall, as it's called sometimes. Yeah.

And we had that wall. It closed off the house a lot. And so we decided to do this. My Erin decided, my wife. We knocked out the half wall and we put in railing.

Okay.

And when it was first put in, it was nice and sturdy. And just over the years, it's gotten a little more wobbly and a little more wobbly. And it turns out that all they did was they took the corner posts, set them down and screwed it into the. Into the wood, the top flooring, the 1 inch piece of wood. But then the way they connected that wood to the subflooring was finishing nails. That's it.

Wow. Rather than a bolt.

Rather than a bolt or an actual screw, it was just a bunch of finishing nails. So over the years, as people have touched the rail and moved it at all, it's just gotten wobblier and wobblier. And so we finally just had somebody come out to look at it and see how much it would cost to fix and. Yeah, getting it fixed. So, you know, a lot of the stuff, especially, I mean, if you're doing something like burr from a distance, you can get a contractor who comes out and makes it lipstick on a pig and makes it look good. But who knows what's gonna happen in five, 10 years?

You're gonna be saddled with future maintenance problems that you don't even know are coming your way. You know, what's interesting is I went on a little bit of a rant about this when someone interviewed me on their show last week. I can't remember what show it for the shows where I'm interviewed. If you kind of want to hear my often repeated rags to riches story, you can go to the Jason Hartman in the Hot Seat show where I'm constantly being interviewed on other people's podcasts, sometimes radio or tv, but mostly podcasts. Nowadays I play some of those interviews on my Jason Hartman in the Hot Seat podcast. So if you want to hear some of that stuff, there's some content there for you if you're interested. I went on this kind of this rant about how I don't know why we really view with disdain manufactured homes. I think that is wrong. I think it's an improper perception. I think that homes should be largely, not necessarily completely, but largely manufactured in a factory and assembled on a construction site. The idea that people are still framing houses and laying bricks on a construction site is extremely costly and inefficient and prone to all sorts of quality control problems that could largely be eliminated if they were done in a factory. I can't believe we're not there yet. And you know, there are inklings of it. There have been for decades, of course, but.

Still the vast majority of houses are just constructed the old fashioned way. Construction is one of the industries with the least innovation of potentially any industry. I don't know, I can't even think of a comparison that has maybe less innovation than construction. Maybe you can, Adam, but it really surprises me and not off the top.

Of my head, I can't think. I mean, it's pretty, take some wood, put it together, use your screws, use your nails.

Pretty much the way it was done hundreds of years ago.

I mean, I guess the big innovation was screws instead of just, you know, notching them together as a big innovation in construction.

Yeah, I bought a new home when I moved to Florida here. And you know, as I said many times, I wish I didn't have to buy something, but I just could not find a good high end rental. So I bought, you know, there's some building going on in my area and the only thing I see them bring to the construction site assembled are the trusses for the roof line. Like they'll bring, you know, some of these big triangular shaped trusses, you know, they're all put together, they're assembled and then they'll just, with a crane, lay them on top of the brick, you know, that they built the house out of. But Then it's like put drywall inside and it's just crazy inefficient. It's so expensive. And let me speak to that for just a minute. We got to get to our part one with Doug today here. But people keep talking about and the media keeps writing about and it's totally misleading. And I mentioned this a couple of months ago because I really checked it out because I was impressed. You know, the $20,000 house you can go on Amazon and buy. I encourage you to call those companies up and talk to them on the phone. It is completely misleading. They're selling kits that are just the shell. By the time you construct that house and get the land, do the foundation, do the engineering, which is incredibly expensive, it does not include the electrical runs, it does not include the plumbing, it does not include any of this stuff. By the time you do all that, your house. She kept saying to me on the phone, the last one I called, she kept saying, well, it's comparable to the prices of any new home construction. And I said, stop saying that and tell me how much that is per square foot. And she says, not including land, it'll usually come to about $200 per square foot. I thought, this is no deal at all. It's a terrible deal. What's that? This is just completely misleading. There are uninformed people out there and admittedly I was one of them until I researched this because it just sounded so great. I thought, I'm going to start buying little lots and put a bunch of these prefab houses on them and boom, boom, boom, I'm going to build an empire with that. It seems so cheap. It's just not. It's totally misleading. Now why they can't do it? I mean, I don't know, go shop, double wide mobile home prices. I mean, look, I own a mobile home park with one of our clients. Go shop those and see how much they cost. And that does not qualify as a single family prefab home. You know, that's a different class in and of itself. So all this innovation and construction I keep seeing on the Internet is just not here yet. Where are all the 3D printed houses? Look, if something were real, you'd see it in real life, you'd see it in the marketplace. It's all just hype so far. And again, this is one of those many things I would love to be wrong about. I would love to see these cheap little prefab houses and just pour the foundation, stick the house on it and rent it out, man. I'D be doing that all day long. And I'd be doing Burr all day long too, if it worked. If you want to do brrrr, you better be in the business of brrrr. Okay? Because it'll drive you nuts if you're not. It's so much more difficult than it looks. That's why I'm not spending my time doing it. I like profit as much as the next guy. Guess what? I'm buying a couple more properties now out of my 10:31 exchange from our provider. I just buy from our own providers for my own properties. So there you go. Hey, listen, if I could get a better deal, I definitely would, but haven't found it yet. So if you find it, let me know. Folks, go to jasonhartman.com ask and share your experience and tell me how you did the great ultimate brrrr deal. I'd love to hear more. Adam. Shall we get to our guest today.

And let's do it.

All right, let's talk to Doug about future pricing and real estate PE ratios, part one today and part two tomorrow. Here we go.

So future expectations, what do they mean to the real estate market? What do they mean to the stock market? What do they mean to the overall economy both nationally and globally or actually even locally in your state or city? They mean a lot. Future expectations determine a lot of things. And I'm here with one of our investment counselors. You've heard him on the show before and that is Doug. And Doug, let's talk about future expectations first. Let's kind of start off well before we talk about the stock market and PE ratios and then tie that into real estate. You are self managing and you just took one of your properties and started using the cozy rent collection or payment platform. And we've had the cozy people on the show before tell us how you like it and how that experience has been so far. I know you're new at it.

It was really just a couple of days ago I was reconciling some of my stuff and I said, I thought to myself, you know what, I'm just going to jump in. I'm just going to give it a shot. I have an existing tenant. Worst case I'll figure out my way through finding somebody new, doing keys, all that stuff. And I just sent a note to the property manager and said, hey, want to let you know I've decided to self manage according to the terms I have to provide. 30 day notice. Here's the 30 day notice. Please send me their deposit. You know, I Already have a copy of their, of their lease. I actually put that up on Cozy so they were able to see it. And then, you know, I said, please send me their contact information. And they did. I got their name, phone number, email. So I sent them an email, said, hey, I'm going to be signing you up for Cozy. Just wanted to say I'm looking forward to working with you directly. And then she wrote back, this is to the tenant. So the tenant, yeah, she said, hey, that sounds great, you know, I'll look for the email, get sent up on the platform. And so then I set up the profile, set up the property profile, tenant profile, all that, which was really easy. And then just send it on out. And then what I'll be able to do is to be able to set up the rent schedule collection for Cozy, to be able to upload documents and then when the property goes vacant, to be able to list it for setting a new tenant in. And then they can also send in maintenance requests. Well, you know, there's a couple of good advantages you can have here, you know, because one of the ways that Cozy makes money is that, you know, you can either get expedited rent collection or you can buy a rent profile. Well, once I have this tenant and I'm talking with them directly, I'll be able to put a rent profile together. I haven't raised the rent for a couple of years, so chances are they're going to be under the market. And so then I'll just share this with them directly and say, hey, I did a rent comparison and it looks like we're priced under the market. But I don't want to create a big rent shock. So maybe we can put something together where it's like, you know, if, you know, we can walk up the rent and I'd like to do some fix ups of the property, you know, so that you're getting some fair value. Now I don't, you know, now what the tenant doesn't know is that I want to do those fix ups anyway. But if they feel like they're getting something for their increase in rent, that's going to make them feel a lot better about the process, you know, because I think one of the things at least that I like about the self management idea is with that direct contact you can have good customer service with your tenants to be able to cultivate a meaningful relationship. I was reading through my contract with the property manager and boy, there's all these little exclusions and weasel clauses. This is the late fee will be $50 plus $10 per day, plus whatever will be collected and this much will be deducted. This much will go here or there. And I was like, oh my God, that's just so complicated. And so I like the fact that if you're going with self management, you can really just simplify things for your tenant because they don't want their lives to be complicated any more than I do.

Yeah. You know, a confused mind always says no. And I attribute this is to a major part of the success of the most valuable company in the world. Well, most of the time, I don't know, today, maybe I'm off today. But Apple, right, Apple Computer takes a complex product and makes it really quite simple. Okay? Even you know, making a decision which one to buy, they, they make that really easy. You don't have to, it's not too over complicated. And the same is true here, you know, make it simple for your tenants. We' gotta always remember our tenants are our customers. Heck, they're paying our mortgages off for us. And they're paying a little extra each month in most cases too. So it's a pretty great deal. And when you get the property manager out of the way and you use the apprentice line by some guy named Donald Trump, I think he was the star of that show, you know, you're fired, right. And you get direct with these tenants, it just goes better. It's actually the funny thing is some people, like I've said before, they think, oh, you know, I don't have time to self manage. It sounds good to me, but it takes too much time. And then, you know, you heard our client Drew Baker on the show several times talking about it, you know, he's, he's a little more of like an extreme self manager, right. And he's doing things that are actually really improving his properties. But to just be a, you know, sort of a stay the course self manager takes very little effort. And I would argue in many cases, many, many, maybe even most cases, it takes less effort than having a property manager because when you get that third party out of the way and you remove that conflict of interest that is just naturally there. And you have a simple buyer, seller, you know, landlord, tenant relationship, it's really quite easy.

And I think there's another benefit too, which is that what you do is you generate value by doing something that's useful. And a lot of modes of passive investing, like for example, say I plunk 10,000 bucks in the S&P 500 and just go away for 20 years. And it'll have appreciated, hey, that's great. But the thing is, if I need to repeat that or if I lose all my money and I don't have 20 years to wait for the market to go up, I'm out of luck. But on the other hand, if I've learned how to create value and gotten good at doing things that are valuable for other people, then that's actually an economically viable skill that I can use in the future if I want to, need to, or have to.

Right, right. So you could always get a job in property management.

Well, you know, or the other thing is, is that like, for example, you know, I could say, hey, if I start getting good at virtually managing properties, maybe I could just virtually manage properties for other people and continue to do it from my house.

Yeah, that's a good point. Yeah, there's all kinds of things. Look, life is about improving our skills all along the way. Never stop learning, always improving. And this is a great way to just improve your skills. You know, we have several different tech people that work for us. They take these projects and work on them and you know, it's usually takes longer and costs more than they say it will. And that's just disappointing. But you know, whenever possible and practical, and I know I'm gonna hear it from the people, oh, you gotta delegate everything. You know what, you can over delegate stuff, some stuff. It's better to do some things yourself because technology has made it so easy to do these things for ourselves in many ways that it's actually more effort to delegate it. Now listen, I believe in delegation. I've had lots of employees in my life and lots of people I've delegated to, but sometimes it's actually easier not to delegate it. And you know, that's a fine line. We all got to figure out where that is. But whenever I have these tech people working on a project for me and we'll be on a screen share call on Skype or whatever, you know, I'll say, hey, show me how to do it. You know, I want to learn something. And what comes out of that learning is so much more than just learning how to do that thing. I gain, even if it's gradual, a deeper and deeper understanding of how these things work. And we want to just be constantly improving our skills. So hey, hats off to you on that one. I think that's a great side benefit. You're gaining a new skill by self managing.

The thing too then is that when you're no longer dependent on property managers, now you can really start Hawking for the good deals instead of needing to filter by the people who you're really certain aren't gonna rip you off.

Yeah. Tell us what you mean about that a little more. Sure. Like the contractors and the handyman and stuff like that.

So for example. Right. You know, there's the advice that I give to a lot of my clients, you know, is that the person you partner with on a real estate deal is as important as the property, if not more so, because they are going to be your eyes and ears. And, you know, they can't turn a bad property into a good one, but they can turn a good property into a bad one, into a bad experience.

That's the truth. Yes, absolutely.

A good property manager, they can't turn a turd into a bar of gold, but they can turn a bar of gold into a turd.

And it can work one way but not the other. Good for you.

Exactly, exactly. And so if you get to where you can effectively and efficiently self manage, you know, now what you can do is now you can say, hey, I'm looking for things that are good deals. And, and if there is a competent manager associated with that deal, great. If not, I can still go after it. I'm not constrained by it.

Okay, so let's talk about what that means in the real world. So for example, our investment counselors, including you, will try to match the client to some extent with the team that they think suits them. You know, some clients want like a real hands off experience and they say, hey, you know, I just don't want to be bothered, just do it. And certain managers, you know, please that kind of client more often than not. Whereas other clients, they want a real hands on experience and other managers will cater to that more. Okay, but when you take the manager completely out of the equation, then you can just solely look at the property alone, not based on any degree of service consideration or anything like that. So yeah, I agree with you, I agree with you. But hey, let's not belabor this because we really wanted to talk about future expectations. We want to talk about future expectations and what they mean to multiples when you're investing in real estate or investing in anything in general. So let's just dive right into that now. And we were having a good conversation before we started today, Doug, about Lehman Brothers, for example, and 10 years ago when the Great Recession started, most people would mark that point is when the day that Lehman Brothers failed just over 10 years ago, and you said something that was pretty interesting. Now I just repeat what I Say, all the time is that the day before the Great Recession began and the day after it began, the amount of real assets in the world did not change. Okay, There was the same amount of gold, the same amount of oil, the same amount of real estate, the same number of companies, basically, except Lehman Brothers. You know, it was pretty much the same. There was same number of cars, houses, you know, widgets. They didn't go away. The only way they go away is through war. War destroys things, right? There wasn't a war. It was simply a change in allocation and derivative value of these assets. And that's why derivatives are so dangerous. But also socialism.

Socialism destroys things, too, because there were all kinds of assets in the Soviet Union and down in Venezuela that were completely neglected and just basically left because nobody.

Had to take care of them.

Okay, okay. But that's kind of a tangential. Yeah, I agree, though, and interestingly on that. If you look at communist countries and you think about the environment, oh, my gosh, like when the Soviet Union fell, I mean, I remember reading a Greenpeace magazine way back then, profiling what they found, and it was just massive environmental destruction. Because when nobody owns the land, why should anybody care about it? You know? But tangent. Tangent alert. Okay, let's go back on top, Doug. So what else changed in the world when Lehman failed? It was future expectations. Talk to us about that. Yeah, yeah.

It's because the way that any asset is priced is going to be right. It'll have an intrinsic value, and then there will be a future expectation of performance or growth. And so, for example, a stock is valued at what they call a price to earnings multiple. So in other words, there's earnings per share.

A good old PE ratio.

Yep. If you own a share of a company, then you have a claim to a certain amount of earnings, and that is in many cases, expected to grow in the future. And so what will happen is the price of a stock will be bid up to a multiple of those earnings, which basically say, what are the expectations for the future of that stock? So in the case of the Great Recession, what changed between one day before Lehman collapse and one day after Lehman collapse was the future expectations. I think the reason why that reaction may not have been rational, but might have been more rational than some people think, is that when you're talking about things like credit markets and the market's going up, right. Everything's good. You can buy, you can sell. If you make some money, great. If you lose a little money, it's okay. But as soon as markets start Going down and start going down fast. All of a sudden you run out of people to sell to. Nobody wants to buy anymore because everybody's afraid of trying to catch a falling knife. So that means that if you want to sell your credit derivatives or you want to sell your credit default SW or sell your CDOs, or wait, or.

Sell your condo in Manhattan, New York City, or your, or Miami, or your, your house in Los Angeles or Seattle or San Francisco, the reason people are buying properties that violate my commandment number five, which is thou shalt not gamble, is because of future expectations. And that's the only reason someone is going to buy such a nonsensical investment.

Right, Exactly. And the thing is that that works until it doesn't work, but then the problem is when it doesn't work, it doesn't work in a very spectacular and destructive way. Because, you know, if you get that townhouse in San Francisco that's 3 million bucks, and now all of a sudden it goes down to two and a half. How many people are going to say, hey, this is a great bargain, I think I'm going to buy it. They'll say, no way, I'm not touching it. Unless you'll drop it down to two.

And then the thing is, that spiral will just keep going until you get a lot of people who say, hey, you know what, this price actually makes sense. This is just a credit cycle, right? This is how things go is that anytime that you have a credit based economy, which nowadays every economy is credit based because there's big benefits to it. But the big downside is that credit makes it really easy to overvalue assets. And then as soon as the value of those assets start going down, all of a sudden everybody who borrowed money to buy is in a pinch and so they have to sell to avoid losing more money. Well, all that selling creates a downward spiral until eventually all the people who bought on credit have either been shook out of the game or if they were smart, have been able to just stay through. And then the prices restabilize.

Yeah, absolutely. Okay. So the thinking that messes people up, I mean, there's a lot of different thoughts that mess them up in this environment on both sides of it. But one of them is that, hey, look it, If I pay $3 million for this nonsensical place in whatever overvalued market it happens to be, could be Vancouver too, or San Diego. Doesn't matter if they do that, they think, well, you know, what's the worst that could happen? Here's the rationalization. And it's wrong because of what you said. This rationalization does not work in real life. They think, well, hey, you know, if the economy softens up a bit and you know, say there's a recession, you know, if it goes down by 10%, so what? But that's not really true. It doesn't go down by 10%, usually because of that spiral. When that credit dries up and those future expectations evaporate, it's got to come a long way down to where those expectations start to say, hey, you know, maybe this is a good enough deal. And this is why we have cyclical markets versus linear markets. Because when that future expectation evaporates, the cyclical market, it really evaporates badly. Okay.

And fast.

And quickly. Yeah, and quickly, but not as fast as the stock market. And the PE ratios there, that'll go really fast because it's so much more liquid than the real estate. But in the, in the linear market, it doesn't evaporate very quickly because the property was never that out of sync with reality. I mean, you could argue that every property that's financed is out of sync with reality because it's a credit based asset. And that's fair in concept. But the question is always compared to what? And it's always compared to linear, hybrid, cyclical. Okay.

Although, Jason, I would actually take that idea even further. In a linear market where you have a property that's rented out to a tenant for a sensible rent that's at a sensible ratio, it actually doesn't even really matter if that market perception evaporates because you're still covering your costs and you can wait for the market perception to come back to being rational. You can't do that in California, you can't do that in New York. You know, but if you're sitting there with a property in Memphis, you've got it rented out to somebody and you're covering your mortgage plus maintenance and then some.

Right.

Even if the market value drops in half, you can just keep paying your mortgage until it comes back.

Yeah, absolutely. But you can still screw yourself up on that one because your own psychology can get weird. And you know, sadly, we saw some clients sell their properties during the Great Recession and immediately after. And I'm thinking, what are you doing? The thing's coming back right now. Now granted, if the property's really overvalued and there's a bad loan on the property. Well, one of the other wonderful things about income property is you have the nuclear option, the back door option, is to just walk away like millions of people did. You know, the contract is simple. It says either pay the mortgage or give us back the collateral. Okay, here's the collateral. You can have it.

Yep. No, exactly. That's exactly something you can do.

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